Can a founder get shares for contributing IP or equipment instead of cash?

You built a prototype, a patent filing, a brand, a software codebase or a machine. Your co-founders put in cash. You want your share of the company to reflect what you brought, not a bank transfer you cannot make. Can the company simply hand you shares for the asset?

Yes. The Companies Act 2013 allows it, with a process. Skipping the process leaves you with a cap table you cannot defend and a return the Registrar may reject.

This article covers a company not listed on a stock exchange, as almost every new startup is.

What the law actually allows

When a company wants to issue further shares, the starting point is section 62(1) of the Companies Act 2013. Shares must first be offered to existing equity shareholders in proportion to their holdings, unless the company uses one of the other routes in the same section.

One of those routes is the one founders use for non-cash deals. Under section 62(1)(c) of the Companies Act 2013, a company can offer shares "to any persons", if the offer is authorised by a special resolution, "either for cash or for a consideration other than cash", provided "the price of such shares is determined by the valuation report" of a registered valuer. A special resolution is a resolution passed by a larger majority of members than an ordinary one, and it is filed with the Registrar.

So three things must line up:

• A special resolution of the members authorising the issue.
• A price fixed by a registered valuer's report.
• The other conditions the rules add. These are in the Companies (Share Capital and Debentures) Rules 2014 and the Companies (Prospectus and Allotment of Securities) Rules 2014.

"Consideration other than cash" is the legal phrase for what you are bringing: IP, equipment, a licence, property. The rules also treat the issue as a "preferential offer", meaning an offer to selected persons, and require it to comply with section 42 of the Act, the private placement section (rule 13(1), Companies (Share Capital and Debentures) Rules 2014).

What you can still do today

If the company is formed and the shares are not yet allotted, you can still paper the deal properly. If you are already shown as a shareholder without this process, speak to a CA before filing anything.

Before the resolution: get the valuation

The price of the shares must be based on a registered valuer's report. The rule is explicit for non-cash deals: "where shares or other securities are to be allotted for consideration other than cash, the valuation of such consideration shall be done by a registered valuer who shall submit a valuation report to the company giving justification for the valuation" (rule 13(2)(i), Companies (Share Capital and Debentures) Rules 2014).

Points founders often miss:

• The valuer is appointed by the audit committee, or in its absence by the Board of the company (s.247(1), Companies Act 2013). If your company has no audit committee, your Board does it.
• The valuer must make an impartial, true and fair valuation, and must not value an asset in which he has a direct or indirect interest, or became interested during the three years before appointment or three years after the valuation (s.247(2), Companies Act 2013). A valuer you have a side-arrangement with is a problem.
• "Registered" means registered under the Companies (Registered Valuers and Valuation) Rules 2017, and registration is by asset class. Those rules define an asset class as a distinct group of assets, "such as land and building, machinery and equipment" (rule 2(1)(c), Companies (Registered Valuers and Valuation) Rules 2017). The eligibility table lists plant and machinery, land and building, and securities or financial assets. Ask any valuer you approach which asset class they are registered for, and whether that class fits your asset. For equipment this is usually straightforward. For IP, confirm before you pay for the report.

The report should state the method and assumptions. The rules ask for the "justification" for the valuation, and the PAS-3 form later asks for details of the non-cash consideration.

The deadline clocks

Several clocks run in a non-cash allotment:

You will see both fifteen and thirty days for the same form, and they are not in conflict. Rule 12(1) is the general rule: any company with share capital that allots securities files Form PAS-3 within thirty days. Section 42(8) and rule 14(6) are the specific rule for an allotment made under section 42, the private placement section, and they shorten the period to fifteen days. A non-cash allotment to selected persons is a preferential offer that must comply with section 42, as noted above, so the shorter fifteen-day period is the one to work to. The Act itself leaves the day count for the general return to the rules (s.39(4), Companies Act 2013), which is why rule 12(1) carries the thirty days. The 2023 amendment to the Prospectus and Allotment Rules (G.S.R. 37(E), 20 January 2023) replaced the form and omitted rule 12(6), but did not change either period.

The late-filing penalty under section 42(9) is one thousand rupees for each day of default, up to twenty-five lakh rupees, and it falls on "the company, its promoters and directors".

Step by step

Step 1: Check the articles. The issue must be authorised by the company's articles of association (rule 13(2)(a), Companies (Share Capital and Debentures) Rules 2014). If the articles are silent, amend them first.

Step 2: Get the valuation report. As above, from a registered valuer appointed by the Board.

Step 3: Board meeting. The Board approves the valuer's report and the draft notice, and calls the general meeting.

Step 4: Explanatory statement and special resolution. The notice of the general meeting must carry an explanatory statement under section 102 of the Act. For a preferential offer, the rules list what it must contain (rule 13(2)(d), Companies (Share Capital and Debentures) Rules 2014). Among the items:

• the objects of the issue and the number of shares;
• the price, and the basis on which it was arrived at, along with the registered valuer's report;
• the class of persons to whom allotment is proposed, and the names of the proposed allottees and their post-issue percentage;
• the change in control, if any;
• "the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer".

Because you, the contributor, are a proposed allottee, expect to be named, along with your post-issue percentage. Separately, the private placement rule requires that each private placement offer be approved in advance by a special resolution of the members (rule 14(1), Companies (Prospectus and Allotment of Securities) Rules 2014). One well-drafted special resolution should cover both requirements, but have a CA confirm the wording.

Step 5: File the resolution. File a copy of the special resolution with the explanatory statement with the Registrar within thirty days (s.117(1), Companies Act 2013). A company issues the private placement offer letter only after the relevant special resolution or Board resolution has been filed with the Registrar (rule 14(8), Companies (Prospectus and Allotment of Securities) Rules 2014), so do not leave this to the thirty-day limit.

Step 6: Private placement offer. An offer under section 42 goes by a private placement offer letter in Form PAS-4, addressed to the named person and sent within thirty days of recording the person's name (rule 14(3), Companies (Prospectus and Allotment of Securities) Rules 2014, as substituted in 2018 by notification G.S.R. 752(E) dated 7 August 2018). The offer "shall not carry any right of renunciation" (s.42(3), Companies Act 2013). The company must keep a complete record of private placement offers (rule 14(4) of the same rules).

Section 42(4) requires any subscription money to come by cheque, demand draft or other banking channel "and not by cash". The rule that payment must be made from the subscriber's own bank account does not apply to an issue of shares for consideration other than cash (rule 14(5), second proviso, Companies (Prospectus and Allotment of Securities) Rules 2014).

Step 7: Written contract. Document the transfer of the asset to the company. When the return is filed, the company must attach a copy of the duly stamped contract under which the securities were allotted, together with any contract of sale if it relates to a property or an asset, or a contract for services or other consideration (rule 12(3), Companies (Prospectus and Allotment of Securities) Rules 2014). If no written contract exists, the company must furnish complete particulars, stamped as if they had been reduced to writing, and the Registrar may require the stamp duty to be adjudicated (rule 12(4) of the same rules). Stamp duty differs by state, so check your state's figure before signing. A written assignment or sale agreement is better than relying on rule 12(4).

For IP, make clear what is transferred: an assignment, not just a licence, if the company is to own it.

Step 8: Allot and file Form PAS-3. Allot the shares, record them in the register of members, and issue certificates. File Form PAS-3 within the clock above. It must carry:

• a list of allottees with names, address, occupation if any, and the number of securities allotted, certified as complete and correct (rule 12(2), Companies (Prospectus and Allotment of Securities) Rules 2014);
• the stamped contract (rule 12(3));
• the registered valuer's report on the consideration (rule 12(5) and (7));
• for allotments under section 42, particulars of the consideration received if shares were issued for a consideration other than cash (rule 14(6)(iv)).

Step 9: Book the asset properly. A depreciable or amortizable asset is carried to the balance sheet under the accounting standards. Otherwise it "shall be expensed as provided in the accounting standards" (rule 13(2)(j), Companies (Share Capital and Debentures) Rules 2014).

What not to do

• Do not allot first and paper later. The special resolution and valuation come before the allotment, not after.
• Do not pick a number between co-founders. The price must be "determined by the valuation report" of a registered valuer (s.62(1)(c), Companies Act 2013).
• Do not let the allotment drift. If twelve months pass after the special resolution, you need another (rule 13(2)(e) and (f), Companies (Share Capital and Debentures) Rules 2014).
• Do not confuse this with sweat equity. That is a different route, for directors and employees providing know-how or intellectual property rights (s.54, Companies Act 2013; rule 8, Companies (Share Capital and Debentures) Rules 2014). Ask a CA which fits.
• Do not ignore tax. Transferring an asset to your own company for shares can have income-tax consequences for you and for the company. Those depend on the asset and the structure, and they sit under the Income-tax Act, 1961 or the Income-tax Act, 2025 depending on the year. Take advice before signing.

What to do now

• Next step: Ask your Board to appoint a registered valuer for the right asset class, and have a lawyer draft the assignment or sale agreement. Authority: s.62(1)(c) and s.247(1), Companies Act 2013; rule 13(2)(i), Companies (Share Capital and Debentures) Rules 2014.
• Deadline: Allot within twelve months of the special resolution (rule 13(2)(e), Companies (Share Capital and Debentures) Rules 2014); file the resolution within thirty days (s.117(1), Companies Act 2013); file Form PAS-3 within fifteen days of allotment (s.42(8), Companies Act 2013; rule 14(6), Companies (Prospectus and Allotment of Securities) Rules 2014).
• Consequence of missing it: A late return under section 42(9) attracts a penalty of one thousand rupees for each day of default, up to twenty-five lakh rupees, on the company, its promoters and directors. A late resolution filing attracts a penalty on the company of ten thousand rupees plus a further one hundred rupees a day after the first, up to two lakh rupees (s.117(2), Companies Act 2013).

Have a CA review your facts before you act or file.

FAQs

Can I take shares for my laptop and my software skills?
Equipment and IP can be consideration under section 62(1)(c), if valued by a registered valuer. Pure future services are a different matter. The PAS-3 form has a separate line for "services (give nature of services)", but the company still needs a valuation and a justification. Ask a CA before you design this on services alone.

How many people can the company offer shares to under private placement?
Section 42(2) says "fifty or such higher number as may be prescribed", excluding qualified institutional buyers and ESOP employees. The Prospectus and Allotment of Securities Rules, as substituted in 2018, fix it at two hundred persons in a financial year (rule 14(2)).

Why does PAS-3 have both a fifteen-day and a thirty-day deadline?
Thirty days is the general rule for any allotment (rule 12(1)); fifteen days is the specific rule for allotments under section 42 (s.42(8); rule 14(6)). For a non-cash issue to selected persons, work to fifteen days.

What if the company has already allotted shares without a valuation?
Do not backdate anything. The facts, dates and documents will decide what can be corrected and what must be disclosed. A CA should review the file before any filing is made.

---

See Also

• Raising Your First Priced Round: The Private Placement Procedure Under Section 42
• Converting our LLP into a private limited company
• Startup India (DPIIT) recognition rejected — what to fix and reapply